Sweet v. Cardona: The Administration’s Other Student-Loan Cancellation Program

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Sam Fendler:  Hello, and welcome to this Federalist Society virtual event. My name is Sam Fendler, and I'm an Assistant Director of Practice Groups with The Federalist Society. Today, we're excited to host "Sweet v. Cardona: The Administration's Other Student-Loan Cancellation Program," with Jesse Panuccio. Jesse is a partner in Boies Schiller's Washington D.C. and Fort Lauderdale offices. Jesse has served as the Associate Attorney General of the United States, the number three position at the DOJ, and as general counsel to the governor of Florida.

 

      Today, Jesse's practice focuses on high-stakes litigation and appeals, particularly in the areas of regulation and crisis management. You can find Jesse's full and impressive bio on our website, fedsoc.org. After Jesse delivers his opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window, and we'll do our best to answer as many as we can.

 

      Finally, I'll note that, as always, all expressions of opinion today are those of our guest speaker and not The Federalist Society.  Jesse, thank you very much for joining us today.

 

Jesse Panuccio:  Thank you, Sam. Pleasure to be here.

 

Sam Fendler:  Great.  Now, the title of our program today is, "Sweet v. Cardona: The Administration's Other Student-Loan Cancellation Program." Can you start off by telling us what is meant by that, and give us some background of the case?

 

Jesse Panuccio:  Well, I'd be glad to, Sam. And thanks again. Thanks to The Federalist Society for inviting me to discuss this important case. I think it's a case that deserves greater awareness by those who are following these issues. So let me take you through it. What is this case, Sweet v. Cardona, all about? What is the title of this Teleforum all about? To unpack that, I need to start by first explaining a little bit about something called "borrower defense," which is a facet of the federal student loan program. But it may be something that even those who have some basic awareness of federal student loans may not know exists.

 

      So let's start with the Higher Education Act, Title IV of the HEA, as I'll call it throughout the rest of our conversation. Under Title IV of the HEA, the Secretary of Education administers student loan programs, including the direct loan program, which consists of loans that are issued directly from the federal government. There used to be another program called the FFEL program, which was federally-backed loans that weren't issued directly from the government. But the majority of student loans now are these direct loans from the federal government.

 

      As of 2021, the last balance sheet I looked at earlier today, the Department of Education had $1.1 trillion in outstanding principal and interest in the direct loan program.  So it is a massive federal program and a massive -- the debt for that, that is owed to the federal government, is a major piece of the Department of Education's balance sheet. Now, one aspect of the Direct Loan Program is that, pursuant to a provision of the HEA, "the Secretary" — and here I'll quote the HEA — must "specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment."

 

      So, what does that mean? It means that if a borrower, or someone who took out a federal student loan or federal direct loan, can point to certain misconduct by a school that led the borrower to take out the loans — so imagine a school openly defrauded the borrower and convinced them to enroll in the school through fraudulent statements — the borrower can assert a defense to repayment. Now, the contours -- as I just read to you, there's really just one line in the HEA about this, so the contours of the borrower defense program were left to the Secretary to set out in regulations that have to be promulgated, like all rules and regulations, through notice and comment rulemaking under the APA.

 

      And the Department has exercised that power now four times over the years, including recently in a rule that is not yet effective, but, if not challenged, would become effective later this year. But, as we sit here today, there are three rules that are affected. One is, for any loans dispersed prior to July of 2017, your borrower defense gets adjudicated, gets processed under the 1995 rule. If you had a loan that was dispersed between -- prior to July 2020, between that time period, July '17 and July 2020, then you are adjudicated under the 2016 rule, an Obama-era rule. And then, for anything dispersed after July of 2020, your borrower defense claim would be adjudicated under the 2020 rule, which was a Trump-era rule.

 

      Now, regardless of which rule applies to a given borrower defense claim, the process proceeds in two steps, according to all of the rules. First, in step one, the Department must provide notice. After a claim comes in, the Department must provide notice to the school that's implicated in the claim that the claim has been submitted. And then the school is able to submit any kind of response or evidence or information it wants. The Department then must consider that information and the information that the borrower has provided, and it adjudicates -- internally, through an agency adjudication, it adjudicates the claim, makes decisions about the allegations, and then issues a written decision with reasoning.

 

      So that's step one. An agency adjudication of the claim. Step two occurs only if, after a step-one adjudication is granted, the Department finds a school did, in fact, engage in misconduct, grants the application, and discharges the debt. In that case, the Department may initiate proceedings against the school to recover the amount that was discharged from the loan. So, ultimately, a borrower defense can lead to a school having to repay the loan, even though, in the first instance, it's the Department that's going to cancel the debt, and, also, potentially, grant refunds for prior payments.

 

      So, that's some background on borrower defense, generally. Now, let me turn to Sweet v. Cardona, and what that case is all about, or, I really should say — and you'll see why — what that case was all about and, now, what it has become. In 2019, a group of student loan borrowers sued the Department of Education, alleging that the Department had engaged in what they called "a policy of inaction on borrower defense applications." And they said this constituted, under APA 5 U.S.C. § 706(1), unlawful agency delay or agency action unreasonably withheld.

 

Now, the plaintiffs in this case are represented by the so-named Project on Predatory Student Lending, which is, if you look at their website, an advocacy and activist group that takes a particular position about a sector of the education industry, sometimes known as the for-profit industry, and they're opposed to it.  And they support policies and lawsuits that they do not like this form of education that millions of students have used to better their careers. But this group is opposed to it.

 

      Now, this group was originally housed at Harvard Law School, but has recently spun off to be "independent." But, as I say, on their website, they say they represent students against the for-profit college industry. Now, the suit was brought in the Northern District of California, which certified a class of student-loan holders that had filed borrower defense claims and not yet had them decided. So the idea was it would be a class of anyone who was being affected at the time by this alleged policy of inaction by the Department.

 

      Now, we can have a different call on whether the allegations that there was actually a policy of inaction were true, and why the Department had been enjoined by another court. Its methodology had been enjoined. So, it was attempting to figure out how to go forward. And there's a lot to unpack there, but less relevant to what is happening now. 

 

      So, we get this class certified. Now, the class was certified under Rule 23(b)(2). And, for those who are civil procedure mavens on this webinar, or you may recall from law school that that is an injunctive relief class, not a monetary class, so it's a (b)(2) class. There are very specific requirements for a (b)(2) class that must be met. I'll get into those in a little bit. But, notably, when the district judge, the district court, certified the class, the court said it was to control for all purposes, including settlement. That is the only class order in the case. It is still the binding class order, as of this day.

 

      Now, in their complaint — and this is important — the plaintiffs were explicit in describing the relief they sought and the relief they did not seek from a federal court. And I'm going to read this, because it's important to the entire case and what's happening now. Here's what they said in their complaint: "Plaintiffs do not ask this court to adjudicate their borrower defenses. Nor do they ask this court to dictate how the Department should prioritize their pending borrower defenses. Their request is simple: they seek an order compelling the Department to start granting or denying their borrower defenses, and vacating the Department's policy of withholding resolution."

 

      So that's what this case was about. That's the relief the plaintiffs sought. Keep that in mind. We’ll get to it in a little bit as to why that is so important now. In 2020, as the case went on, the parties — and this was still during the last administration, during the Trump administration — the parties reached a full settlement, which they lodged with the court. And that settlement would have had the Department restart adjudications and issue borrower defense decisions on a timeline that had been agreed to.

 

But, during the approval process, the plaintiffs started objecting to, and filed with the court, objections to what they alleged were "form denials" of borrower defense claims by the Department. And they said, "These form denials are unlawful. We should get a fully reasoned decision." The district court, after hearing this, rejected the settlement and said, "I don't think there's a meeting of the minds as to what the settlement means, and, therefore, I'm rejecting it.

 

And then the court did something very unusual for a district court. Rather than have the plaintiffs direct the case — that settlements denied case has got to go forward; it's the plaintiff's case; they decide — the district court instructed the plaintiffs as to how the case would move forward from there. And they said, "You're going to take extra-record discovery." Remember, this was an APA unlawful delay case. And, without seeking it, the plaintiffs were granted extra-record discovery, including depositions of high-ranking Department of Education officials and extensive document discovery outside of the administrative record.

 

      The court, then, also directed plaintiffs to file a summary judgment paper. And the case was going to proceed from there. After that, the plaintiffs added a second count. So, remember, there was only one count in the case, at this point. It was about unlawful delay. They added a second count. They had a supplemental complaint. They said, "We're also challenging these form denials, and we say, "The Department should have to lawfully adjudicate each and every borrower defense application."

 

After that, plaintiffs spent many months pursuing this extra-record discovery. And they spent more than a year — more than a year, in this case — focused solely on trying to get a deposition of the former Secretary of Education, former Secretary DeVos. That effort ultimately led the Ninth Circuit to issue an extraordinary writ of mandamus blocking the deposition, which the district court had allowed, over objection. During that appeal, which took a year, plaintiffs failed to advance the litigation at all.

 

They essentially stood down on all of their claims while they were trying to score this high-profile deposition. That will also become relevant, as they now complain about the need for immediate relief. As it turns out, while the Ninth Circuit mandamus case was pending, the Project on Predatory Student Lending was secretly negotiating a settlement inside the halls of the Biden administration. This was not known to the public or to anyone else who was potentially interested in the case at the time.

 

And, especially interesting is that at the Ninth Circuit oral argument on the deposition issue, a judge specifically asked the Department of Education and the plaintiffs whether such negotiations were occurring. And both of those parties essentially side-stepped the question and refused to give the Ninth Circuit a straight answer as to whether negotiations were happening and whether a settlement was imminent, and what that settlement might look like.

 

      Interestingly, just after the Ninth Circuit issued its mandamus writ, all of a sudden, the parties told the district court on a public filing in the docket, that, low and behold, they had been negotiating a settlement and the case might go away. And so maybe this deposition wasn't necessary after all. On June 22, about six months later — meanwhile, the district judge does not vacate anything, because there is no settlement, so there's still a summary judgment schedule in the case — on June 22, just as summary judgment briefs were coming due and being filed, the parties announced they had reached a class settlement. And they moved the court for preliminary approval.

 

The draft settlement lodged with the court looked nothing like the lawsuit that had been pending and had been litigated for the last three years. And I'll get to that in a second. But first, I should note something fairly extraordinary about this. I just said, "The settlement is lodged on June 22." At that point, again, there was still a summary judgment schedule in place. So the Department of Justice, on behalf of the Department of Education, on June 23, had to file its motion for summary judgment in its defense against plaintiff's motion.

 

In its summary judgment papers, the federal government said the U.S. Department of Justice informed the court that, in its view, "The case is moot and must be dismissed," because the Department of Education had long ago restarted borrower defense adjudications, and it had agreed to rescind all of the alleged form denials and go ahead and re-adjudicate those claims.

 

      This contention was supported by a sworn declaration from Richard Cordray. Some people might know that name. He was a high-ranking official in the Obama administration, ran for governor of Ohio, is now the head of federal student aid in the Biden administration. He submitted a sworn declaration on behalf of the Department, saying, "We have granted all the relief that is being sought in this case." And DOJ lawyers told the court, "Therefore, it is moot. You have no Article III jurisdiction to hear this case for another day."

 

      DOJ also contended in its brief that there was no longer any legal basis for the court to maintain class certification, again, because this was a (b)(2) class, that the injunction relief sought had already been granted by the Department, so there was no basis to maintain a class. Now, despite its contention that the case was no longer suitable for class treatment and was, in fact, moot, the DOJ agreed to this sweeping settlement and moved the court to approve it, even though it felt the court no longer had jurisdiction. And, I must say, this move is unprecedented, as far as I can tell. And the sweeping claims of executive authority in this settlement, which I will walk through, are, as best I can tell, unprecedented for the Department of Justice.

 

      The settlement proceeds along three tracks. Essentially, it creates three subclasses. First, the settlement notes that the certified class closed on the date of execution of the settlement. So the latest you could have become a member of the class was June 22, 2022. It then splits that class into two subgroups. Sub-class one consists of class members who have debt associated with the schools' programs or school groups listed on something called "Exhibit C" to the settlement.

 

      And, for that class, the Department will, within 12 months of final judgment, automatically discharge the debt and refund all amounts previously paid to the Department. So, just to understand this, if you were in that class — it's about 200,000 people — the Department will erase all remaining debt, but not just erase debt, go back and repay every dollar you paid on a federal student loan.

 

      "Further," the Department writes in the settlement, the parties write, "If there is a substantial question as to whether debt is associated with a listed school, that question is going to be resolved in favor of the class member" — in other words, in favor of granting relief — "without further inquiry, adjudication, or process provided to the school." In other words, a school may say, "That person didn't go to this school." And the settlement says, "Doesn't matter. We're granting relief as if they did go to your school." So the settlement takes away the right of the school to even look at their enrollment records and say, "This is a false claim. This person didn't go here."

 

      The parties estimated that about 75 percent of the class — again, 200,000 borrowers — will receive this automatic debt cancellation and refunds without any individualized adjudication of their claims. Now, Exhibit C lists 151 educational institutions in this country. And the settlement offers zero, none, no explanation as to why any school is on this list. But the motion seeking preliminary approval offered a single sentence of explanation.

 

Now, think about this. The Department of Education, U.S. federal regulator for educational institutions in this country, is making a major determination about 151 educational institutions, and they offered one line of explanation. And this is what it is: "because the Department has identified common evidence of institutional misconduct by the schools, programs, and school groups identified in Exhibit C to the agreement, it has determined that every class member whose relevant loan debt is associated with those schools should be provided presumptive relief under the settlement, due to strong indicia regarding substantial misconduct by the list of schools, whether credibly alleged or, in some instances, proving, and the high rate of class members with applications related to the listed schools."

 

Now, that's a mouthful. That's a single sentence. But I would urge anyone interested in this, go pull it. And we can put the briefs on your website, Sam, on the Federalist Society's website. But what the Department is saying here is, "Just based on allegations and the number of them, we are concluding guilt. We're not actually saying we adjudicated it and found any of the allegations to be proven. We're just saying, based on the high rate of class members with applications related to the schools, we're going to go ahead and determine what they call "substantial misconduct by the listed schools."

 

So, let me just repeat this. The U.S. Department of Education has decided to provide blanket cancellation of student debt and refunds of all prior payments based solely on alleged misconduct, without ever having conducted a single adjudication or heard a single defense from any of 151 listed schools. And the process was so cursory, secretive, and hasty, that, incredibly, after the district court granted preliminary approval of the settlement, the parties file a motion with the court and they say, "We need to actually remove several schools from the list, because they were included based on unexplained 'clerical errors,' and we're going to go ahead and add another school to the list." 

 

But, again, we're not explaining why that particular school is being added to the list. So, this was so sloppy by the Department of Education that they had to come hat in hand to the court and say, "Four of these schools don't even belong on the list. It was just a mistake." But, again, no explanation to anyone, including those schools, how they got on the list in the first place.

 

So that's sub-class 1, debt cancellation and refunds for 200,000 borrowers who have never proven a single allegation, and 151 educational institutions find themselves on a list that supposedly represents their federal regulator's determination that they engaged in substantial misconduct. Now, if this sounds familiar to anyone who is maybe a student of British history, you may recall something called the Star Chamber.

 

And this is essentially how that operated, which is, everything happened in secret, including the allegations against you. And then a decision was rendered without you ever being able to mount your own defense. English common law eventually adopted something called due process. And so the American system doesn’t have a Star Chamber like this, apparently, again, until now. We will get more into the due process problems a little bit later. Let me just round out the subclasses. And then, Sam, I'll turn it back to you for some questions.

 

The second subclass consists of borrowers whose debt is not associated with an Exhibit C school. That's about 68,000 additional people. For this group, the settlement establishes a new "review process". But it is not a review process found in any of the existing properly, legally promulgated borrower defense rules. The review, such as it is, requires a series of presumptions that essentially guarantee a finding of wrongdoing by any accused school, and, thereafter, full relief of debt cancellation and refunds of prior payments.

 

As a result of these presumptions, a borrower's claim cannot be denied — now listen close to this — cannot be denied for; 1) false allegations by the borrower;2) insufficient evidence by the borrower;3) lack of reliance by the borrower on any supposedly false statement, or; 4) untimeliness, not meeting the statute of limitations. In other words, there is no substantive or procedural defense that could be put up against a borrower defense claim. So, when they call this a review process, what they really mean is, we're just delaying these people, these 68,000 people, a little bit more than the first 200,000. And then we will grant their claims automatically as well.

 

So that's two subclasses. Then I said there was a third. Now, remember, the class closed on June 22. The third class is a group that was not part of that class at all, not certified to be part of that class. The parties have called this -- they've invented a term. I've never heard of it before in my entire career as a federal litigator, or in my time at the Department of Justice. They're calling this group "post-class applicants." And this is anyone who files or filed a borrower defense claim between the lodging of the settlement on June 22 and final approval, which ultimately happened in November of 2022.

 

In other words, at the time it was lodged, the settlement created an avenue to include any person who held a federal student loan and just filed a claim. Now, the settlement parties spent months after the settlement was lodged, heavily recruiting people to file these claims. If you go look at the Project on Predatory Student Lending's website, or the Department of Education's website, or even the FTC got in on the act, and they ramped it up and they said, "You should file claims against your institutions and get in on this settlement that we've announced."

 

Now, as it turned out — and maybe unsurprisingly, given the recruitment — this post-class applicants' group turned out to have nearly as many people as the original certified class, essentially doubling the potential cost of the settlement from about 7.5 billion, as best we can tell, to probably 15 or 20 billion, at this point, although the Department of Education has not been transparent with the public or the court about the true cost of this settlement. They’re sort of ramming it through, and not giving anyone numbers about -- they're giving the plaintiffs numbers, secretly. But the public is not allowed to see how much this settlement is going to cost.

 

Now, for post-class applicants — this third group — the settlement requires the Department of Education, again, to "review their applications." But, as I told you earlier, you may remember, depending on when your loan was disbursed, you will either be adjudicated under the Clinton-era rule, the Obama-era rule, or the Trump-era rule. This settlement does away with all of that for the post-class applicants and says, "If you file during this time, we're going to adjudicate you under the Obama-era rule, no matter what, even if you should be under the 2020 rule.

 

Now, what's interesting is the 2020 rule gives a lot more due process protections to the schools and requires a bit more, in terms of proving your claim. So, the Department has gone back to the earlier, less stringent rule, through this settlement. Now, if the Department of Education does not complete this so-called review within 36 months, regardless of the reason and regardless of what's in the claim, even if it's completely bogus claim, the Department must automatically grant the claim and grant full relief, that is, cancellation of debt, and full repayment of prior payments.

 

So what's really going on there, if you read between the lines, is the Department of Education can simply sit on these adjudications for three years and then automatically grant another 200,000-plus of these applications, again, regardless of timeliness, regardless of substance, regardless of falsity. They get their application — their borrower defense application — granted.

 

So that's what's known as the Sweet v. Cardona settlement. I honestly am struggling to find a time when I have come across anything like it. It sets up an entirely new regulatory regime. It spends billions of dollars out of the Treasury, without an appropriation from Congress. And it was collusively cooked up behind closed doors between an advocacy group and a regulator that it lobbies, that it seeks action from, without any input from most of the affected parties or the public or Congress.

 

      Now, as you might expect, the settlement came as a shock to institutions that found themselves, without notice, on the Department's Exhibit C list, or otherwise affected by the settlement. And that list caused, and is still causing — it should be obvious — reputational, programmatic, and financial harm to the schools on it. Accordingly, four schools sought to intervene so they could object to the settlement. They sought to intervene once it was lodged, and file objections to approval.

 

Both plaintiffs and the Department resisted, opposed intervention, with the Department going so far as to file a declaration stating that the determination that led to Exhibit C could not be used for non-settlement purposes. In other words, this determination of substantial misconduct was significant enough for the Department to enter a $20 billion settlement. But it was a ticket good for this trip only.

 

The district court rejected intervention as a right. But it did grant permissive intervention for the purpose of the parties lodging objections to the settlement. So, Sam, I've been talking about this for a while. There's more to go. But it's a complicated case to understand for those who haven't been following it. So, I want to lay out the borrower defense regime, the settlement, which creates a new borrower defense regime.

 

The key takeaway, just in terms of understanding the settlement, is this: we all know, at this point, about the Biden administration's plan to cancel student loans. It was a campaign promise of the president. It was a directive of the president to the Secretary of Education, "Find a way to do it." And their main plan is what's called the 10-20 Plan. It's what was heard at the Supreme Court last week, the Nebraska and Brown litigation where they say, under the HEROES Act, because of COVID, they can cancel massive amounts of student debt on a blanket basis.

 

      Now, reading tea leaves at the Court, it looks like that claim of authority might be in some trouble. So why is this case important? Well, this case is the backup plan. This shows you their backup plan, that as soon as the Supreme Court says "You can't do this under the HEROES Act," the Department of Education is going to pivot and say, "No problem. We can do this under the HEA, same thing. We have sweeping authority under the HEA to cancel any loans." And that's what they're using to justify the settlement, the HEA. "If we can do this for this settlement, we can cancel all student loans."

 

      Now, I'll get into this point a little further, likely, in a few minutes, based on your questions, Sam. But the key point is that if you care about this issue, if you think the Secretary of Education and the President of the United States do not have unilateral authority to cancel $1.7 trillion of federal debt with the stroke of a pen and that Congress should have some say in that, or the Court should be some kind of check on that, then you need to be following this case too.

 

What's going on in the Supreme Court is important. What's going on here is the backup action. And it may eventually become the lead theory that they have. So, with that, Sam, I've been going for a while. Let me flip it back to you and see what other questions you might have.

 

Sam Fendler:  Well, Jesse, those are excellent opening remarks. And it gives us both a solid foundation and a lot to think about, going forward. But I want to start by asking you something a bit smaller, and then we can walk it out. You've explained why the parties had an interest in intervening. What objections, specifically, have been raised?

 

Jesse Panuccio:  That's a good question. And that's probably the last piece I need to provide to round this out. I've quipped elsewhere that to describe this settlement is to state why it's illegal. I think, just, probably, from hearing my description, the folks watching this, if any of them are federal litigators at all, probably have already identified five or six objections that they would have to it. There are so many problems, it's hard to know where to begin. But let me catalog a few of the major objections. I recommend our briefing to others.

 

And I should disclose — I'm not sure I did at the beginning — I represent a party in this case. So, I represent one of the interveners. I meant to say that at the beginning. So, folks should certainly come to their own conclusion. You can go read the government's briefing and the plaintiff's briefing. And they'll tell you why they think we're wrong. But this is our view, my view, on the case. So, I'll tell you what our objections have been.

 

First, as the DOJ explained back in June, the United States Department of Justice, in a brief signed by DOJ and submitted to a federal judge, said that court had lost jurisdiction of this case some time ago. The case is moot. And, thereafter, the court had no power to consider or approve the settlement. Once a case is moot, that's it. It must be dismissed. Federal courts cannot act without jurisdiction. The plaintiffs were very clear throughout this case. Remember that quote I read from their complaint at the beginning of this call. They only sought a restart of adjudications and a withdrawal of any supposed form denials. They received that a long time ago. Richard Cordray, in his declaration, swore up and down to the federal court that that relief had been granted.

 

So, notably, even as the DOJ pressed the court to approve this settlement and maintain jurisdiction over the case, it told the court, "You don't have jurisdiction." And, to this day, the DOJ has never retracted that statement. It is their position that the case is moot. And every time we raise this, DOJ drops a footnote and they say, "We're not going to brief jurisdictional issues. That's for the plaintiffs to brief.

 

I honestly think that is stunning for the Department of Justice to have the view that a case is moot, but then also say a federal court can enter an order that spends $20 billion of taxpayer money and makes sweeping findings about federal authority, without the DOJ believing that there's actually jurisdiction for the case to go forward. I think it's an absolutely stunning position by the Department of Justice that I am hoping they will be forced to publicly explain somewhere, either in front of a court or in front of Congress, because it is a stunning position for the Department to take.

 

Another objection, and, again, one that DOJ itself explained in its summary judgment brief in June, is that class treatment — this is a class settlement — is no longer proper under Rule 23. Now, there are a lot of reasons for this. There's a lot of briefing on it. But I'll highlight just a few. First, for post-class applicants -- remember that third group that I said was added, and they were recruited, and they just filed claims? No class certification motion was ever made on their behalf. And no judicial inquiry was ever conducted as to whether they are a proper class or subclass.

 

Yet, this group of now more than 200,000 people is having its rights and duties adjudicated and compromised by the entry of a settlement which is affected through a binding final judgment of a federal court. Second, the certified class — remember I said it was certified under Rule 23(b)(2), and that requires a single, indivisible injunction to provide relief to all class members. But this settlement that I've just described, with its complicated, multivariate, and monetary relief, obviously cannot satisfy the requirement of a single injunction that reaches the whole class and grants relief. So it's not proper as a 23(b)(2) class anymore.

 

And then, third, the settling parties have now admitted in their briefing, repeatedly, that the settlement, as opposed to the original lawsuit, implicates the substance of each and every borrower defense claim and the individualized circumstances of each borrower. In other words, Rule 23's commonality and typicality requirements for class certification have now been eviscerated by the shifting focus of the case from one about unlawful agency delay to one about individualized relief for each and every class member.

 

So that's a second objection, is jurisdictional objection about class certification. A third objection, and a very important one, nationally, and relates to the Supreme Court case is that the Department of Education lacks statutory power to enter this settlement. For one thing, as, hopefully, is obvious to the administrative lawyers listening to this, this settlement grossly violates the APA. It establishes, without notice and comment rulemaking, an entirely new regime for processing borrower defense claims.

 

For example, post-class applicants, as I mentioned, will have their claims adjudicated under the 2016 rule, even if the 2019 rule applies. So, the Department, through a settlement, has basically said, "We are repealing the 2019 rule and using the 2016 rule. It is a complete end-around of APA requirements. More fundamentally, on the statutory front, the Department has identified only the HEA, the Higher Education Act, as providing authority for its actions here.

 

Now, interestingly, the Department does not rely on the HEROES Act, as it does in the Nebraska v. Biden case. Specifically, here, the Department points to 20 U.S.C. § 1082 (a)(6). And that says, "In the performance of, and with respect to the functions, powers, and duties vested in him by this part, the Secretary may enforce, pay, compromise, waive, or release, any right, title, claim, lien or demand, however acquired, including any equity or any right of redemption.

 

Now, again, for those who want to see, it's 20 U.S.C. § 1082(a)(6). Now, there are many problems with this argument. I won't get into them all. But first, Section 1082(a)(6) applies to loans, as I said, issued under "this part." Now, the issue for the Department is "this part" that is being referred to there, refers to FFEL loans, not to the direct loans that make up the bulk of borrower defense claims and the claims at issue in this case. So, on its face, this one single statutory provision that they've claimed for authority does not apply to the loans at issue.

 

Now the Department says, "Well, that's okay, because the HEA, for direct loans says, 'They shall have the same terms, conditions, and benefits, and be available in the same amounts as loans made to borrowers in the FFEL program'". The problem with that argument is the Secretary's powers to pay, compromise, waive, release any right or title are not terms and conditions of a loan. The terms and conditions of the loan are set out in great detail elsewhere in the statute. And they do not include the Secretary's general powers. The Secretary's general powers are the Secretary's powers, not a term or condition.

 

But, even if the government is right that the direct-loan provisions of the HEA incorporate 1082(a), then DOJ and the Department of Education have another problem. And that problem is that 1082(a)(2) — so they're trying to move under 1082(a)(6), but if they go back a few paragraphs and look at 1082(a)(2), it bars federal courts from issuing any "injunction or other similar process against the Secretary." So, if they are right that there is an incorporation into the direct loan program of 1082(a), then the federal court still does not have jurisdiction to enter this settlement, because the settlement is essentially an injunction against the Department.

So, either way the government cuts it, they cannot get there. Either they don't have the incorporated authority, or, if it is incorporated, they have a jurisdictional bar.

 

Finally, just to round out the objections — there are others, but the major categories of objections — the schools have, as should be evident from my description, very serious due process objections. They have been placed on Exhibit C, and determined by their federal regulator to have engaged in "substantial misconduct," without ever having any notice or opportunity to be heard.

 

In fact, in the case of my client, the borrower defense rules require when a borrower defense claim comes in and implicates a school, the Department must provide notice to the school. To this day, my client has never received notice from the Department of a single borrower defense claim. And yet, they are being labeled to have engaged in substantial misconduct under those claims, without even knowing they exist.

 

These schools have been stripped of their rights, under lawfully promulgated agency rules. And they are suffering imminent and increasing reputational harm, which then snowballs into programmatic and financial harm, over time. We have filed declarations showing some of that already. And it will only keep increasing with time. So, long answer, Sam, but those are the objections in a nutshell.

 

Sam Fendler:  So, these are the objections that you made in your capacity representing one of these schools at the district court level, I'm guessing, right?

 

Jesse Panuccio:  Right.

 

Sam Fendler:  And, so, how did the district court rule on these arguments? And where is the case now?

 

Jesse Panuccio:  Good question. I'll keep this short. But after hearing the objections in the fall and having a hearing on the motion for final approval, the district court rejected all objections to the settlement, and granted final approval in November of 2022. Three of the intervening institutions filed a notice of appeal and then moved the district court to stay its judgment pending resolution of the appeal. The court then held a hearing on the stay and denied it.

 

The district court did grant a very temporary stay so that the schools could file a stay motion in the Ninth Circuit. But the court only stayed effectuation of the settlement as to borrowers who went to the three intervening institutions. It did not grant a stay, even a temporary stay, as to the whole settlement. So, the three schools have now filed a stay motion in the Ninth Circuit, which is pending. I believe the federal government actually just filed its brief moments ago, I think, right before I got on this call. So, I haven't seen it yet.

 

But, meanwhile, it appears, from what we can tell, that the federal government has opted not to give the Ninth Circuit the opportunity to rule. And it's, instead, moving forward immediately with debt cancellation, despite having a year or more to do so under the settlement. So, I think that will be something the federal DOJ lawyer is going to have to stand up and explain to some Ninth Circuit judges as to why they didn't provide that opportunity to the Ninth Circuit.

 

My own personal perspective is this is about as raw an exercise of unchecked executive power as you can imagine. The administration is essentially taking the view that it will wait for neither Congress nor the judicial branch to have a say in serious questions like this. So, take that for what you will, in terms of how the federal government is conducting itself here.

 

Sam Fendler:  And, Jesse, you mentioned that the Ninth Circuit has seen this case once before. And what happened there?

 

Jesse Panuccio:  Yeah, we talked about that a little bit. The plaintiffs -- again, they were represented by this Project on Predatory Student Lending, which, on their website, tells you what they are. They are a group that has a particular view of what American education should look like and not look like. And they push very hard for that. And they sort of have their enemies list of schools they're going to go after, and they go after them.

 

They sought to take the deposition of the former Secretary of Education as sort of a high-profile -- a lot of times these are gambits. They're stunts in litigation. There is binding long-term Supreme Court case law that you don't get to take depositions of cabinet members in administrative law cases. It's rooted in the separation of powers. This is a 1940's Supreme Court case that has pretty much gone unquestioned until this arose.

 

And so that necessitated a lengthy objection process and then a trip to the Ninth Circuit. And the Ninth Circuit had no problem issuing a mandamus writ to quash that deposition order. But what's interesting about it is it took a year or more to get through. And, during that time, as I said, the plaintiffs just stopped litigating. Now, in opposing a stay, they say, "Well, we can't possibly wait for an appeal, because we'll be harmed."

 

But, just a year ago, the plaintiffs or the plaintiffs' counsel were perfectly content to wait for this high-profile deposition that turned out to be not relevant to their settlement and not relevant to the case, and not allowed, in any event. They were perfectly willing to wait more than a year for that and not advance their case. But now they say, "We cannot give the Ninth Circuit time. We can't even give the Ninth Circuit a few weeks to figure out whether it wants to stay the case." So, there's quite a juxtaposition there, in the position of the plaintiffs.

 

Sam Fendler:  Earlier in your remarks you were talking about sort of a lull in the case where the plaintiffs weren't advancing and there were some conversations, presumably behind closed doors. I mean, it's certainly not open to the public. This sounds similar to practices in the past that some have called "sue and settle" practices that we saw some years ago under previous administrations. I'm wondering if you could talk to us about sue and settle practices, what those look like, what that means, and if you think this case right now represents something like that.

 

Jesse Panuccio:  Good question. Yes, so, sue and settle -- it wasn't unique, but it certainly was on steroids during the Obama administration. It was something that became a major topic. There are examples of it from administrations before that. But it, essentially, means that an interest group or a plaintiff or a group of plaintiffs with whom an administration sympathizes ideologically or politically sues over a law or a regulation that the administration cannot easily change through lawful processes like getting a law through Congress or engaging in rulemaking. That takes a long time. Politically, you just can't do it sometimes.

 

      So, what will happen is a party will sue and say, "Well, I think that rule is illegal," or "I challenge that statute." And then, DOJ, rather than fulfilling its obligation to defend federal law, settles the case by agreeing to relief. That essentially accomplishes the political goal that the administration is unable to accomplish in Congress or through notice and comment rulemaking or some other lawful process.

 

So, the idea is, get a friendly to sue. They sue. And then, DOJ uses its settlement power to accomplish what the underlying agency itself could not accomplish. This is an example of that, because, has Congress passed debt relief? No. Just a few years ago, Speaker of the House Pelosi said, "We have to do this and we haven't done it." And now, all of a sudden, the Department is able to do it through a settlement signed off on by the Attorney General. If you can't get it through Congress, you should not be able to do it through a settlement.

 

      Now, when I was back at DOJ -- and you gave me a promotion, Sam. I don't want anyone to think I was resume-padding. I was in an acting role back then. But, when I was there, it was a focus of our leadership team at the time to put guardrails around this and get rid of this, I think, terrible abuse of DOJ's power. And so, we prohibited "sue and settle." You could have legitimate settlements, but you can't do this kind of thing and do something that could not be achieved through other lawful means, including even adjudication through final judgment.

 

      Unfortunately, one of Attorney General Garland's first acts in the first few months of his tenure was to eliminate those guardrails. And so, I think we're seeing a backslide into sue and settle practices at DOJ. And if you worry about separation of powers, if you think Congress should control the power of the purse, this is something to watch especially closely, and, frankly, to be concerned about.

 

Sam Fendler:  No question. And I think that ties in neatly to what is kind of in the background or, perhaps, looming over this entire case, which is, the current cases in front of the Supreme Court about student loan relief. And I'm wondering if you could just address that directly, how you think the outcome of those student loan cases that the Supreme Court heard last week may affect this case.

 

Jesse Panuccio:  Great question. I think they're very interrelated. Well, first of all, again, just as a policy matter, it's important for folks to understand, I say this is the backup plan. This is the backup plan, right? If the Supreme Court says, “The HEROES Act does not allow blanket loan cancellation," we now know the administration's going to immediately pivot and say, "No problem. I've got another statute. Let's try that one." And who knows what they'll have after that. Maybe we'll just keep going through all of the federal statutes.

 

But they're going to say the HEA allows this. But there's some similar language. So, to the extent the Supreme Court gives us some meaning about, or interprets the HEROES Act, to the extent we get further fleshing out of the major questions doctrine and whether Congress actually did hide a $1.7 trillion blanket loan cancellation power in these provisions of the HEROES Act, I think that will have a great effect on this case and what might get said about the HEA. So now this case is up in the Ninth Circuit. So it's climbing a ladder. And I think you'll be hearing a lot more about it in the wake of the Nebraska case.

 

Sam Fendler:  If I remember correctly, Jesse, you were saying that the amount of money that's specifically involved in this Sweet case is not exactly known. But I think one could presume that there might be less money at stake in this case than in the case that the Supreme Court heard last week, Nebraska v. Biden. What does that mean for the major questions doctrine, as it relates to this Sweet case?

 

Jesse Panuccio:  Good question.  Well, is there less money at stake? I mean, no and yes. To the extent that the settlement, how much money is going to go out under this settlement, we don't exactly know, because, again, there's been a total lack of transparency. We know it's at least, minimum, 7.5 billion. And that's for the first two sub-classes, roughly speaking. We know they've doubled, thereabouts. In their recruiting efforts in the last three months, we know they've doubled that. So, let's assume it's going to be another 7.5, 8 billion. So, you're approaching 15 billion, 20 billion. That's a big number.

 

And they've said this in their briefing. They said, "Well, it's not as much as the Nebraska case and not as much as EPA v. West Virginia. They're in the hundreds of billions. So, therefore, major questions doesn't apply." But major questions isn't about a single dollar amount for a single application of the claimed power. The question is, what is the power you are claiming? And what would be the implications of that power if the agency has it?

 

The power they are claiming under the HEA is that at any time, for any reason, the Secretary of Education can waive or otherwise cancel every single student loan in the country. That currently stands — and it will grow as there are more loans — at $1.7 trillion. And that's just the debt that is owed. In this settlement, they're saying, "Not only are we going to cancel the debt, we're going to refund the prior payment." So, I don't know. Add another few trillion onto the power they are claiming.

 

So, when they say, in this case, major questions doesn't apply, it's a complete misdirection to point to the specific dollar amount of this settlement, unknown as it is. You have to look at the power they are claiming and what its implications are. And its implications are absolutely sweeping. It will make the Secretary of Education, I guess, second only to the Treasury Secretary, in terms of financial power, and the power to alter the economy of this country. And this is an economy-altering power that they are claiming.

 

Sam Fendler:  No question.  Have there been any amici in this case yet?

 

Jesse Panuccio:  Not yet. It's been in the district court. We're now in the Ninth Circuit, so I expect that would change. I would think that any of the coalition of states that are objecting to the claim of authority and the implications for them under blanket cancellations of loans under the HEROES Act would have an equal or greater interest in this case. As I mentioned, the HEA authority is just the backup plan. Not just, it is -- significantly, it's the backup plan.

 

And, of course, anyone who cares about the rule of law who thinks that the separation of powers is meaningful, who thinks that Rule 23 or federal jurisdiction matters, should be aghast by this case, and will, hopefully, get involved. So, I'm hoping we'll see some robust amicus participation.

 

Sam Fendler:  Jesse, I want to ask you -- you were talking about the post-class applicants. Just based on what you said, I'm curious of your opinion on this. Is there a possibility that someone totally unrelated to these 151 schools and potentially lacking a legitimate case for borrower defense, as we know the requirements for borrower defenses — we know what that means — could somebody potentially receive loan relief as a post-class applicant, kind of regardless of how they're connected to the schools and to the requirements for borrower defense?

 

Jesse Panuccio:  Absolutely. So, here's the deal with the settlement. And I'll make one correction. But all of these claims — whether you are in Subclass 1, the Exhibit C group; Subclass 2, the adjudication without any standards; or Subclass 3, which is adjudication under the 2016 rule — in every one those, there is, either automatically, or an avenue toward getting your loan canceled, even if the facts you allege are false or the application was untimely. And why is that?

 

Well, for the first class, for the 151 schools, I was going to say, if you went to those schools, the Department has said, "We're not looking at the individual claims. We are just granting." So, if John Doe said he went to XYZ college and, in fact, he did not, he is having his claim granted under this settlement. There is no defense.

 

The Department will not look at and will not consider false allegations or unproven allegations or lack of reliance. And that's true for both of the first two subclasses. For the third subclass, they say they're going to adjudicate under the 2016 rule, which at least has some standards. However, they also say, "If we're not done in three years, you automatically grant. It doesn't matter what it says." So, yes. 

 

      And, one correction, Sam. If you're in the post-class applicants, you're outside of the 151 schools. Well, no, I'm sorry. You could be inside the 150. You could be post-class. But post-class applicants deal with every institution in the country. Everyone from Harvard University, where the plaintiffs' counsel worked, to the schools on the list, to the smallest community college in the country, is implicated by the post-class applicants, potentially.

 

Sam Fendler:  Jesse, you've given us a lot to think about. And our time is running short. I'm wondering if you have any final thoughts for the audience.

 

Jesse Panuccio:  Well, one, just want to thank you, Sam, for moderating and asking these incisive questions. I want to thank The Federalist Society for hosting this. Of course, The Federalist Society welcomes debate, so don't take my word for what's going on. Go read the briefing. Read the court's opinion. See who you think has the better of it.

 

But my own view is a fair look at this settlement will show that our objections are very substantial. And for those who are interested in the education space in this country or federal power and separation of powers, this is a case to watch as it makes its way through the Ninth Circuit and, perhaps, beyond. But that's all from me, Sam.

 

Sam Fendler:  Excellent. Well, certainly, from me, and, of course, on behalf of The Federalist Society as well, I want to thank you for sharing both your time and your expertise with us today. I want to thank our audience too, for joining us. We greatly appreciate your participation. Please, check out our website, fedsoc.org, or follow us on all major social media platforms at FedSoc to stay up to date with announcements and upcoming webinars. Thank you all once more for tuning in. And, we are adjourned.